September 2012

September 28, 2012

The FHFA's
Office of Inspector General has reported on its
audit of the FHFA's process for approving business decisions of
government-sponsored enterprises Fannie Mae and Freddie Mac. Although the agency
broadly delegated most of its conservatorship authority back to the GSEs in
2008, they are required to obtain FHFA approval for selected business decisions,
such as those involving legal settlements over $50 million and risk limit
increases.

Treasury
Secretary Tim Geithner has sent a letter
to the members of the Financial Stability Oversight Council regarding recent
developments in the effort to reform the money market fund industry and address
the threats those funds can pose to the stability of the financial system. He
urged the council to use its authority under Section 120 of the Dodd-Frank Act
to recommend that the Securities and Exchange Commission proceed with money
market fund reform.

According to
Geithner, without further reform “our financial system will remain vulnerable to
runs and instability, which are harmful for retail and institutional investors,
businesses that need a reliable source of funding, the MMF industry, and the
financial system as a whole.” He asserted that four years after the instability
of the money market fund industry contributed to the worst financial crisis
since the Great Depression, “with the failure of the SEC to act, the Council
should now move forward with the tools provided by Congress.”

The success of
the CFPB “depends on our accessibility to the American public,” stated CFPB
Director Richard Cordray in remarks
before the inaugural meeting of the bureau's new Consumer Advisory Board on
Sept. 27, 2012, in St. Louis, Mo. The board comprises 25 experts from outside
the federal government who will provide guidance on issues being addressed by
the CFPB as well as trends in the consumer financial marketplace. Members
include bank and credit union executives, consumer advocates and community
development experts.

The new board
will consider questions such as the lingering effects of the financial crisis
and the biggest problems facing consumers, credit markets and other markets for
consumer financial products or services. According to Cordray, the CFPB's
mission is “to be the people's advocate and the people's champion...We want the
American public to know that we are listening and we are here to stand on your
side.”

Financial
regulators are being urged to consider the impact of new Basel III capital
standards on community banks and whether they may exacerbate funding challenges
already faced by these institutions. A letter from
53 senators to the Federal Reserve Board, Federal Deposit Insurance Corp. and
Office of the Comptroller of the Currency stated that community banks may change
their business plans as a result of the new rules, which they fear could reduce
lending and economic growth in their communities.

The senators
also noted that the proposed rules are extremely complex, requiring the
reporting and maintaining of “granular data,” which they assert will increase
the compliance burden on community banks. Some banks, the senators argued, may
no longer be able to operate because they lack the resources to meet the new
compliance obligations. The new capital requirements for the Treasury Department
and securities that banks hold in their investment portfolios could also impact
how small banks manage liquidity and interest rate risk, the senators
said.

Bank of America
said it has agreed to pay $2.43 billion to settle a class action lawsuit brought
by shareholders in 2009 who held or purchased the bank’s shares at the time it
announced plans to acquire Merrill Lynch & Co. Shareholders claimed BoA had
made false or misleading statements about the financial health of both
institutions.

BoA, which
denies the shareholder allegations, also said it would institute certain
corporate governance policies. “Resolving this litigation removes uncertainty
and risk and is in the best interests of our shareholders,” said
BoA chief executive officer Brian Moynihan.

Federal
regulators have reopened
the comment period on a proposed rule to establish margin and capital
requirements for covered swap entities as required by the Dodd-Frank Act. The proposal,
jointly issued by the Federal Deposit Insurance Corp., Office of the Comptroller
of the Currency, Federal Reserve Board, Farm Credit Administration and the
Federal Housing Finance Agency, would establish minimum margin and capital
requirements for registered swap dealers, major swap participants,
security-based swap dealers and major security-based swap participants for which
one of the agencies is the prudential regulator.

The
agencies generally have adopted a risk-based approach in proposing rules to
establish initial and variation margin requirements for covered swap entities,
consistent with the statutory requirement that these rules help ensure the
safety and soundness of the covered swap entity and be appropriate for the risk
to the financial system associated with non-cleared swaps and non-cleared
security-based swaps held by covered swap entities. The comment period has been
extended to Nov. 26, 2012, to allow interested persons more time to analyze the
issues and prepare their comments in light of the advisory document on margin
requirements for noncentrally cleared derivatives recently published for comment
by the Basel Committee on Banking Supervision and the International Organization
of Securities Commissions.

September 26, 2012

Consumers should
be prepared for the possibility that the credit score they purchase is
“meaningfully different” from the score used by a lender to assess their
creditworthiness, according
to the Consumer Financial Protection Bureau.

“No consumer
will know in advance whether the score he or she sees will vary significantly
from the score a creditor sees,” the CFPB
study released September 25, 2012 stated. According to the report, one out
of five consumers would likely receive a meaningfully different score than their
creditor, which could result in consumers taking actions that are not in their
best interest.

The
SEC has charged three former
bank executives in Nebraska with allegedly participating in a scheme to
understate millions of dollars in losses and mislead investors and federal
regulators at the height of the financial crisis. The SEC alleges that Gilbert
G. Lundstrom, James A. Laphen and Don
A. Langford played a role in TierOne Bank, Lincoln, Neb., understating its
loan-related losses as well as losses on real estate repossessed by the
bank.

TierOne
had expanded into riskier types of lending in Las Vegas and other high-growth
geographic areas in Arizona and Florida, and the bank was experiencing a
significant rise in high-risk problem loans. TierOne's primary banking
regulator, the Office of Thrift Supervision, directed TierOne to maintain higher
capital ratios as a result of the bank's increase in high-risk problem loans. To
appear to comply with the heightened capital requirements, Lundstrom, Laphen and
Langford disregarded information showing that the collateral securing certain
TierOne loans and real estate repossessed by the bank was overvalued due to the
bank's reliance on stale and inadequately discounted appraisals, according to
the SEC. The losses were understated by millions of dollars in multiple SEC
filings.

Lundstrom
and Laphen agreed to settle the SEC's charges as did Lundstrom's son Trevor A.
Lundstrom, who is charged with illegally trading on nonpublic information from
his father about an anticipated asset sale. The Lundstroms and Laphen agreed to
collectively pay nearly $1.2 million in the settlements, which are subject to
court approval. The SEC's case continues against Langford.

Freddie
Mac structures and markets a family of bonds known as collateralized mortgage
obligations, which it tailors to the specific interests of investors. According
to the FHFA, as investor appetite for floating-rate bonds increased in the
spring of 2010, Freddie Mac capitalized on the opportunity to charge a premium
for structuring these bonds by carving them out of its securitized mortgages. In
the process, it retained by-product variable rate bonds known as inverse
floaters.

The
FHFA's Office of Inspector General examined
Freddie Mac's use of inverse floaters due to concerns that, because the value of
inverse floaters decreases when the underlying mortgages are refinanced, Freddie
Mac could deliberately limit loan refinancings in order to protect the value of
its portfolio. The FHFA-OIG uncovered no evidence that FHFA or Freddie Mac
obstructed homeowners' abilities to refinance their mortgages in an effort to
influence the yields of inverse floating-rate bonds. It found that inverse
floaters represent a small portion of Freddie Mac's capital markets portfolio
and that inverse floaters are “no more likely to adversely impact mortgage
holders or discourage borrower refinancing than any of the mortgages or other
assets that Freddie Mac holds for investment.”